Sprint Corporation (NYSE:S) received a rousing vote of confidence from investors, moving up 20% to nearly $5.90 on July 25 shortly after the first quarter earnings were released.

The No. 4 wireless carrier in the United States beat estimates by a small margin in the second quarter of 2016, adding 173,000 postpaid wireless customers during the quarter - the highest they’ve recorded in the last nine years. In the process, they also achieved the fourth consecutive quarter of growth in their postpaid phone base.

Sprint has been offering plenty of discounts and perks as the company aggressively pursued net additions, but the company’s net loss increased to $302 million - up significantly from $20 million a year earlier. Postpaid churn - the rate at which subscribers leave to other networks - was reported at 1.39% - the lowest level in Sprint’s history in the wireless segment.

Sprint reported revenues of $8.01 billion and a loss of $8 per share, while analysts’ consensus expectation was$7.99 billion and a loss of $8 per share. Though the slightly-better-than-expected revenue results did help, it was actually the net addition number that lifted investor sentiment, sending the stock price over the top.

“We had the highest postpaid phone net additions for a fiscal quarter in the last nine years, including Nextel migration. This was driven by our best ever postpaid phone churn in the company's 20-year history in wireless and continued growth in postpaid phone gross adds. As a result, Sprint was postpaid net port positive against all three national carriers this quarter for the first time in over five years.”

Overall net additions was reported at 377,000 on the back of the migration of Nextel users to Sprint’s network. With 173,000 net adds in postpaid phones, Sprint claimed to be net port positive against “every national carrier this quarter for the first time in over five years” meaning more users switched to Sprint from other services than the other way around.

In my recent Sprint Corporation earnings preview, I noted that 'net additions' was the metric that would send the stock either way. As predicted, the stock jumped nicely on their announcement of a record quarter of net postpaid additions in nearly a decade.

The company also boasted that they beat AT&T in net postpaid phone additions with 400,000 new units added in the first quarter.

The Real Reason for Optimism at Sprint Corp.

There's no doubt investors were as pleased as the management with the results of the first quarter, and I believe their guidance for fiscal 2016 did play its part in instilling investor confidence.

Although there was no upward revision on guidance for the full fiscal 2016, the market has accepted this reality as a matter of fact. Considering Sprint’s stronger performance in Q1 compared to the fourth quarter of 2015 as well as the year-ago quarter, I think investors are fairly confident that the company will be able to meet current guidance on key metrics.

Adjusted EBITDA guidance remains between $9.5 and $10 billion with an operating income of between $1 and $1.5 billion. It’s clear that the company wants to continue its focus on cost-saving measures so that it can improve profitability and stabilize its operating revenue, but the biggest story from the quarterly earnings report is that the company expects to be cash-flow positive next year.

There have been a lot of concerns about Sprint’s liquidity position and whether or not the company will be able to keep moving forward. Sprint reported a negative cash flow of $3.17 billion for FY 2015, but this quarter, CFO Tarek Robbiati put to rest some of the investors’ worries:

“We expect that we will have adequate sources to provide all the capital necessary to fund the business and repay the debt maturities due in FY 16”

Challenges for Sprint

Sprint’s turnaround story is definitely gaining momentum, and the expectation that the company will slowly but eventually get back to being profitable is what is helping the stock move to higher ground. The validation for this comes from record net postpaid adds and a low churn rate, proving that the company can add customers to its list while holding its own flock together despite the intense competition.

On the whole, it’s a great start to the year ahead and, if the company can keep this momentum going, then Sprint Corporation stock will most likely keep moving higher and higher. Sprint’s mantra for this fiscal seems to be: Keep cutting costs; keep adding subscribers.

The challenges to doing this are still immense because they have to keep their pricing in check while adding more users. That’s going to put an enormous amount of pressure to keep their cost-savings measures moving.

It’s a tightrope walk for sure, but they have tasted some success during this quarter. If they can keep moving towards positive cash flow, they might be able to give T-Mobile a serious run for its money despite the latter having usurped their position as the 3rd largest wireless company in America.

Sprint Stock Articles & Video

Following day three of the spectrum auction, AT&T and Verizon remain concentrated in the low spectrum band. T-Mobile has a fairly diverse spectrum portfolio, but does little to exhibit strength at any of the bands. Sprint was absent, but there’s mounting evidence that it’s strategy is still viable over the long run.

Sprint had a stellar quarter, but what is the reality of their future?Both AT&T and Verizon have alternate lines of business. Sprint and T Mobile do not. How long can Sprint live on its wireless business before they need a new revenue stream?

Net additions, operating earnings stability and free cash flow will be the metrics to watch during the 1Q16 call. Churn rates are among the highest in the industry, and adversely affects net additions. Company expects to break even on free cash flow in Q1, and investors will expect to see some quarter over quarter gains in this metric.

Sprint's current stock price has been severely punished in the last two years over legitimate concerns. However, the company is delivering on the turnaround metrics and putting those concerns to rest. This creates a great entry opportunity into the stock because valuations have become really cheap.

Sprint has finally reduced subscriber churn and sustained revenue stabilization. Maintaining the subscriber base, lowering operating costs by $2 to $2. 5 billion and sustaining cell deployment remains critical. I believe many of the risks are already embedded into the stock, and I'm initiating coverage with a hold recommendation.

I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours

I am not an investment advisor, and my opinion should not be treated as investment advice.

I am not being compensated for this post (except possibly by Amigobulls).

I do not have any business relationship with the companies mentioned in this post.

Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

Join Us On

Get Amigobulls On

Copyright2014 amigobulls.com

Historical, current end-of-day data, and company fundamental data provided by Zacks.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
Neither Amigobulls nor any of the data providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the amigobulls.com, you agree not to redistribute the information found therein.
Please read our terms of use and privacy policy.